New System Might Spike Postal Rates

December 12, 2017 Mark Hrywna

Postal rates could climb as much as 40 percent during the next five years under a proposal by the Postal Regulatory Commission (PRC).

In a congressionally-mandated review a decade after postal reform, the PRC said the ratemaking system had been “largely successful in achieving goals related to the ratemaking system but has not increased pricing efficiency,” “maintained the financial health” of the United States Postal Service (USPS) or maintained high quality service standards.

The PRC issued a Notice of Proposed Rulemaking to address the shortcomings identified in the Dec. 1 report. The Postal Accountability and Enhancement Act (PAEA), established in 2006, required the PRC to review the system for regulating rates and cases for postal products.

There will be a 90-day comment period, which ends March 1, and 30 days for reply comments, no later than March 30. That puts a potential vote before the PRC by sometime in the spring.

“I’ve never seen people so upset and surprised by the PRC,” said Stephen Kearney, executive director of the Alliance of Nonprofit Mailers (ANM). “I think most people expected something much more reasonable than this,” he said. Assuming 2 percent inflation, he said rates could increase as much as 5 to 7 percent annually and predicted an “exodus from mail” in an industry that relies on volume.

The proposed rulemaking changes would keep the current Consumer Price Index (CPI) cap on rate increases but add four more potential avenues for a hike:

Another 2 percent for products that are considered “underwater,” or not covering their costs, which tend to be periodicals and Marketing Mail (formerly Standard Mail) flats, such as catalogs and calendars.

“The analogy I keep thinking of is a sick patient whose diagnosis calls for several treatments being given only one drug because that’s all the doctor has available and being given about four times the normal dosage to offset the lack of other needed cures,” Kearney said. PRC Chairman Robert Taub “wants to fix all the USPS problems with only price increases because that’s what his agency regulates,” he said.
“People are already making plans to reduce mailings,” Kearney said, adding that mail volume declined by 5 billion pieces this year, partly in anticipation of what the PRC would announce. “What they did announce is actually much worse than expected,” he said.

Price increases are not what is needed to solve the problems at the Postal Service, according to Kearney, but also further reducing cost of operations and labor and approving a realistic balance sheet. He said USPS real estate assets are “greatly undervalued.”

Kearney expects the proposal to be challenged in court, more likely by mailers. “When you have a service that you’re told is going to go up 40 percent in the next 5 years in cost, in today’s economy, that’s just not sustainable,” he said. The proposal didn’t seem to take in consideration that the Postal Service is high-volume, low-cost operation. “This kind of pricing is going to knock the stuffing out of that volume,” Kearney said.

Other PRC commissioners, including Nanci Langley and Tony Hammond, issued separate comments as part of the order. The system “mostly achieved Congress’s objectives” but there are exceptions, according to Hammond. Much of the Postal Service’s financial instability has been caused by the PAEA’s “imposition of an aggressive prefunding requirement” of the Retirement Health Benefits Fund (RHBF), they said, and suggested that be separated from the evaluation. The price cap framework has worked for the most part, he said, but requires “some adjustment to address areas where it has fallen short.”

In a statement, the Postal Service said it agreed with the PRC’s conclusion that the current CPI price cap does not work and needs to be changed. “We are analyzing the commission’s alternative price cap proposal to determine the extent to which it advances this goal (service..)… “We seek a regulatory system that gives the Postal Service the flexibility to adopt the pricing innovations that will be critical to our ability to compete in the marketplace and to create business value for our customers both today and in the future, and we will continue to work with the commission and our customers to ensure that the mail remains a valued means of commerce and communications,” Postmaster Megan Brennan said. “We are analyzing the commission’s alternative price cap proposal to determine the extent to which it advances this goal,” she said.

“We continue to believe that any price cap is unnecessary in the rapidly evolving postal marketplace, for which all our customers have alternatives to using the mail,” Brennan said. “We seek a regulatory system that gives the Postal Service the flexibility to adopt the pricing innovations that will be critical to our ability to compete in the marketplace and to create business value for our customers…and we will continue to work…to ensure that the mail remains a valued means of commerce and communications,” she said.